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Shriram Transport Finance
Initiation
Overweight
SRTR.BO, SHTF IN
Focus on the franchise. Initiate with OW PT Rs 820
Shriram Transport (SHTF) commands a strong competitive positioning in the preowned commercial vehicle financing space which enjoys higher profitability. The
company has proven ability to manage risks through cycles and has a solid
balance sheet (T1 of 16.6%, CAR 25%). While near term there are concerns on 1)
Slowing growth in CVs 2) Rising funding costs and 3) Ability to use securitization
for funding/capital management, we believe these should start waning going
ahead. Current stock price weakness in our view is an opportunity to gain an
entry into what is still a strong and niche franchise with high entry barriers.
Initiate with OW, Mar- 12 PT of Rs 820 implying a 20% upside from current
levels.
Resilient Demand, Macro Headwinds Nearing End – In SHTF’s core market
(old CV’s), demand is far more stable unlike the new CV segment, as evidenced
by a growing business despite economic/ interest rate pressures. While higher
funding costs and a slowdown in CVs may hurt profitability over the shortterm, our house view is that we are near the end of a tightening rate cycle and
economy is close to bottoming out. An improving macro environment bodes
well for earnings growth, post the near-term slowdown.
Resilient Business Model, Can withstand Regulatory Pressures - Solid
capitalization (even on stringent international norms see page 19) and market
leadership driven pricing power, suggests that SHTF should be able to
withstand the heightened regulatory pressures for non-bank intermediaries.
Specifically on threats to a securitization driven funding model, we note that the
recent changes could suggest less onerous outcome. That said, we expect SHTF
to operate on more diversified funding sources in future.
Share Price Catalysts - Recent RBI statements suggests that the regulatory
pressures on securitization model should be manageable. This has been a
negative overhang. Improving inflation, interest rate and economic environment
should boost earnings.
Our PT of Rs 820 equates to 2.5x FY13 BPS and is based on DDM based
SOTP (COE 15% ROE 23%). Key downside risks relate to an adverse policy
environment for NBFCs / persistent rate tightening.
About Shriram Transport (SHTF)
Shriram transport is one of the largest asset financing NBFC with approximately 20-
25% market share in pre-owned and approximately 7-8% share in new truck
financing. The company has Rs 362B in AUM of which 76% is in the pre Owned CV
market. SHTF operates with 68 business units/ 488 branches (around 16,900
employees) and further has partnership with over 500 private financiers.
Porter Analysis
Threat of competition - Low in used CV space niche operating segment with
limited competition from Banks and NBFCs. Competition in relatively high new CV
financing
Buyer power- Low. Lack of institutional financing alternatives. Private financiers
are more expensive vs. company
Supplier power- Medium .Funding profile is average with heavy reliance on
wholesale financing where costs are going up. Banks have historically relied on
SHTF for their PSL lending but there are concerns on eligibility of securitized loans
sold by the company to get classified as priority sector loans
Regulation risk- High. Tighter regulatory norms may be in the offing as RBI tries to
address "regulatory" arbitrage between banks and NBFCs
Initiate with Overweight PT Rs 820/Share
Shriram Transport (SHTF) stock price off late has been reflecting two near term
concerns:
A challenging macro/ rate pressure which could potentially feed into a demand
slowdown for old commercial vehicles [CV] and near term hurt funding costs;
RBI’s policies, which increasingly point towards a tighter regulatory environment
for the NBFC sector. Company’s ability to do loan securitization for financing/
capital management remains a key issue.
However, we note that the de rating of 30% from Nov-10 levels and 13% YTD
reflect these concerns. The market, in our view, at the moment seems to be
overlooking SHTF’s strong competitive positioning within its niche - pre-owned CV
segment- and high entry barriers around that business.
Given we are probably getting closer to the end of the tightening cycle and
growth is close to bottoming out (JPM Equity Strategy View) , current market
price, in our view, provides a good opportunity to enter a strong franchise
notwithstanding near term concerns, which should start easing in 2H.
Our Price Target of Rs 820/share values the company at 2.5x FY13 P/B and is
derived from a 3 stage DDM based on a normalized ROE of 23% with a COE of
15%. It also values the subs of the business (construction financing etc) at 2x book
(Rs 18/share).
Investment Summary
A strong franchise, in a niche business with high entry
barriers
SHTF's competitive positioning within the pre-owned commercial vehicle financing
market is enviable. This is a profitable market with high entry barriers.
Most of the company's customers in this segment are small road transport operators
(SRTOs). These are typically not the focus segments for banks or other NBFCs given
lack of credit history or financial documentation. Collections (almost 2/3rd) largely
happen via cash and the market is primarily dominated by private financiers.
The company’s main strength then lies in its
Credit appraisal and collection process
Valuation expertise for old CVs
A well known and trusted “Shriram” brand name
And an established business model based on relationships with existing
customers /private financiers for driving new acquisitions.
This then creates high entry barriers which limit competition in the pre-owned CV
space. Most of the competition in this business lies is in the new CV segment (fleet
operators etc) where it is easier to get credit history and do an appraisal.
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